Strategies that works

How winning companies close the strategy to execution gap  ( excerpts from Paul Leinwand & Cesare Mainardi).

“Capabilities are the link between strategy and execution.”

5 mins read

Overcoming the Strategy-to-Execution Gap

A lmost every business today faces major strategic challenges. The path to creating value is not clear.

In one ongoing global survey of senior executives conducted by Strategy&, PWC’s strategy consulting business, in recent years, more than half of the forty-four hundred respondents said they didn’t think they had a winning strategy.1 About two-thirds said that their company’s capabilities didn’t support the way they create value in the market.2 In another survey of more than five hundred senior executives around the world, nine out of ten conceded that they were missing major opportunities in the market.3 In that same survey, about 80 percent of those senior executives said that their overall strategy was not well understood—even within their own company. 

These problems are not caused simply by external forces. They are the outcome of the way most companies are managed. There is a significant and unnecessary gap between strategy and execution: a lack of connection between where the enterprise aims to go and what it can accomplish. We have met many leaders who understand this problem, but very few who know how to overcome it. In another global study, this time of more than 700 senior executives, only 8 percent said the top leaders of their enterprises excelled at both strategy and execution.

Some business leaders try to close the gap on the strategy side, looking for a better market position. Others double down on execution, improving their methods and practices. Despite their efforts, both groups struggle to achieve consistent success.

Yet a few companies seem to have this problem solved. They naturally combine strategy and execution in everything they do. Their products and services have an enviable position in the markets they care about, and they reliably deliver on their promises. At every level of the hierarchy, from the top to the front lines, they seem to have an uncanny ability to make the right choices—even when those choices run contrary to the conventional wisdom of their industry. Each of these firms has its own unique way of competing, but they all have one thing in common. Their success is clearly related to the distinctive way they do things: their capabilities.

Consider these three examples:

 In the early 1950s, a young European entrepreneur decides to sell elegant, functional, inexpensive furniture so that people without much money can have better lives. To draw customers to his relatively remote retail store, he designs it so shoppers can comfortably spend all day, eating in the store’s restaurant and leaving their children in its play area. His business rapidly grows, opening new stores and attracting employees who share a blunt, frugal, and empathetic perspective. Together, they build a remarkable group of capabilities, including an innovative manufacturing and supply chain; a proficiency in designing elegant furniture that ships in a flat box; and a keen ability to understand the way customers live at home and translate that insight into new products. Gradually this business expands to many other countries, becoming the world’s largest home furnishing enterprise. Its name, of course, is IKEA. In its fiscal year 2014, there were 361 IKEA retail stores in forty-six countries, with total annual revenues of €30.1 billion (about US$40 billion). 

A small cosmetics company opens in Brazil in 1969 to sell high-quality, natural personal care products—the kind of products generally unavailable then because of import restrictions. The founders soon expand their ambition, adopting the slogan bem estar bem (“well-being, being well”) to celebrate women’s health and quality of life at every age, rather than the forever-young ideal of beauty many competitors promote. They foster a network of direct sales consultants, who eventually number 1.5 million and who have close relationships with seemingly every woman in Brazil.

To give the consultants a reason to visit their customers every few weeks, the company becomes proficient in rapid-fire innovation, releasing more than a hundred new products every year. It builds on its heritage of respect for nature and local communities by sourcing many raw materials from remote villages in the Amazon rain forest. You may not have heard of Natura Cosméticos S.A., unless you live in Latin America, but its distinctive capabilities have made it the largest beauty products company in that region. It had revenues of 7.4 billion reals (about US$2.6 billion) in 2014.

Two brothers with a commercial real estate business based in the United States acquire an ailing motor vehicle components supplier in the early 1980s. When they discover that its leaders are successfully reviving it using lean production methods adapted from Japanese automakers, the brothers encourage other businesses in their portfolio to do the same. They soon realize they have a knack for buying underperforming companies, improving the way they operate, and bringing them back to profitability. They assemble a distinctive portfolio of enterprises, first in tools and industrial components, and then in the more specialized and profitable arenas of medical, life sciences, and diagnostic devices. These businesses respond well to operational improvements, and most of them have science-oriented professional customers who comprise a welcoming market for innovative new products—so the company raises its game in innovation.

The Danaher Corporation, named after the brothers’ favorite fishing creek, gradually becomes recognized among management experts for its remarkable performance across multiple businesses and its phenomenal M&A success rate. It had revenues of about US$19.9 billion in 2014, and its proposed split into two companies, planned for 2016—a focused science and technology company and a diversified industrial growth company—is generally seen as one more step in its profitable evolution. 

Several other well-known enterprises, including Apple, Frito-Lay, Haier, Industria de Diseño Textil (Inditex), Lego, Qualcomm, and Starbucks, have also transcended the strategy-to-execution gap. These companies are all idiosyncratic; at first glance, they seem to have little in common, and they are rarely thought of together. And yet, they have all built the kind of differentiating capabilities that give them a major strategic advantage.

Capabilities are the link between strategy and execution. They are the place where a company truly differentiates itself, and where the work takes place. But it’s not enough to simply have good capabilities; all companies have them, or they couldn’t compete. A truly winning company is one that manages itself around a few differentiating capabilities—and deliberately integrates them. When companies accomplish this, we say they are coherent.

 The word coherence means something specific to us. It refers to the alignment among three strategic elements:

  • A value proposition that distinguishes a company from other companies (we sometimes call this a “way to play” in the market)
  • A system of distinctive capabilities that reinforce each other and enable the company to deliver on this value proposition
  • A chosen portfolio of products and services that all make use of those capabilities

As we’ll see later in this book, these elements shape your company’s identity, its practices, its culture, its approach to managing resources, its role in the world at large—and its ability to close the gap between strategy and execution. Coherence among these elements is a big deal; in our view, it’s the most important factor in building sustained success.