New York City, January 18, 2011 — Most execs (52%) don’t feel their company’s strategy will lead to success; two out of three respondents admit that their company’s capabilities don’t fully support their strategy; only one in five (21%) are fully confident they have a right to win; and the majority (64%) agree that their company has too many conflicting priorities.
The research also shows that companies with more “coherence” — where executives claim that strategy, capabilities and product offerings are in synch — perform better.
“The survey results tell us that deciding on priorities is a huge issue for companies — and that actually linking priorities to decisions is a hurdle that few companies get past. We see this ‘incoherent’ operating environment across industries and geographies, among all types of companies. It’s draining — and forcing companies to pay a significant penalty. We call it the incoherence penalty,” said Paul Leinwand, co-author of the just-released book The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, December 2010) (www.theessentialadvantage.com).
Executive Frustration is Palpable — and a Marker of Incoherence
According to the survey,
- A great majority of executives (64% of the survey respondents) say that their biggest frustration factor is “having too many conflicting priorities.”
- Executives report that their biggest challenges are (a) ensuring that day-to-day decisions are in line with the strategy (56%) and (b) allocating resources in a way that really supports the strategy (56%).
- Half of the executives (50%) consider setting a clear and differentiating strategy a significant challenge.
- In fact, most executives (52%) do not feel their company’s strategy will lead to success. Only 21% say their company has a right to win in all the markets in which it competes.
- Most executives (81%) say growth initiatives lead to waste, at least some of the time.
- The vast majority of executives (82%) say functional departments in their companies get competing demands from different business units.
Probable Cause of the Frustration: Strategies not Differentiating and Not Focused on What the Company’s Truly Good At
“The root of the problem is that too many companies grab too hastily for what seems like the next answer to growth. They don’t have a solid framework to decide which set of opportunities will lead to sustainable success. They end up stretched thin, trying to play in too many disparate markets. The winners, on the other hand, stick to a well-articulated path to success: They define the fundamental identity of their company by developing a clear idea of what it does best and how it creates value — and focus investment on the capabilities that matter. Growth then follows as a consequence of the strategy rather than as a set of separate and often unsuccessful initiatives,” said Booz & Company Managing Director and co-author Cesare Mainardi.
The survey confirms that few executives find themselves in that kind of "coherent" environment:
- A significant number of executives (43%) say their company’s strategy does not fundamentally differentiate the company in the market.
- Nearly half of executives (49%) say their company has no list of strategic priorities.
- While most executives say their company has a clear way to create value, most (53%) say that this “way” is not understood by employees and customers.
- Similarly, most executives say their company has a clearly stated set of capabilities, but only a third of executives (33%) say those capabilities support the company’s strategy and the way it creates value in the market.
- Very few executives (21%) say all of the company’s businesses leverage the same set of capabilities.
- In fact, most executives (54%) say their company’ capabilities do not reinforce each other.
Bottom Line: Big Problem with the Way Many Companies Set Strategies
“There’s clearly a problem with how a lot of companies set strategies. We passionately believe companies must choose what they will be excellent at — what they will do rather than just what they sell. The survey results, however, suggest that most companies take a somewhat ‘incoherent’ approach,” said Leinwand.
- Most executives (57%) say their company creates strategy by either “pursuing a broad portfolio of strategic options and spreading the risks” or by “choosing an attractive market and figuring out how to be successful in it.”
- Only 43% say their company’s philosophy about strategy starts from the inside — looking at what they’re great at and finding markets that capitalize on those capabilities.
“It’s not surprising that, based on an algorithm applied to the participants’ answers, only 13% of the respondents come from a company that we would deem ‘coherent,’” said Mainardi. (Based on a point system, the algorithm slates companies into three groups — coherent companies, those on the journey towards coherence and incoherent ones.)
The Coherence Premium
The survey results also point to the financial and growth rewards of coherence.
- Executives who say their companies have very few (one to three) firm-wide strategic priorities are the most likely to say their companies have above average profitability and revenue growth (compared to those having more firm-wide strategic priorities or no list of priorities at all).
- Executives who say their company’s capabilities support the company’s strategy are most likely to say profitability and revenue growth are above average. (The same is true of executives who say the company has a clear set of capabilities, vs. those who say the company doesn’t.)
- Respondents whose companies are deemed coherent by the Booz & Company algorithm are most likely to say profitability and revenue growth are above average. (They are more than twice as likely to say their company has above-average profitability than those respondents whose company has been characterized as incoherent by the same algorithm.)
“Companies succeed when they have a well-defined set of differentiated capabilities that connect to their chosen way of competing and their portfolio of products and services. Unfortunately, few companies have these elements in what we would describe as a ‘coherent’ strategy, and therefore don’t have a right to win in their markets,” Leinwand said.
Booz & Company conducted a survey of more than 1,800 executives (including more than 480 C-suite respondents) from companies of various sizes and from around the globe and from a full range of industries. The online survey asked 21 questions on the topics of strategy development, decision making and priority setting, capabilities, growth, and cost cutting. Respondents were asked to rank their company’s profitability and revenue growth relative to their industry, which was used to establish a link between reported performance (profitability and revenue growth) and attributes of and drivers of coherence. The survey can be found at www.strategyand.pwc.com/coherence-profiler.
To learn more about The Essential Advantage: How to Win With a Capabilities-Driven Strategy, its authors and Capabilities-Driven Strategy, please visit www.theessentialadvantage.com and www.strategyand.pwc.com/cds.