-
Guo Fengwu
June 30,
2014
Performance
Management:
Enhancing Execution Through a Culture
of Dialogue
Peter is Chief Executive
Officer for a medical supply multinational that
recently
crafted a new strategy to
counter competitive threats. The plan stressed the
need
to cut cycle time, concentrate
sales on higher-margin products and develop new
markets.
Four
months after circulating the plan, Peter did a
“walkaround” to see how things
were
going. He was appalled. Everywhere Peter turned
people, departments
—
whole
business units
—simply didn’t “get
it.”
<1>
First surprise: Engineering. The group
had cut product design time 30%,
meeting its goal to increase speed-to-
market. Good. Then Peter asked how
manufacturing would be affected. It
turned out the new design would take much
more time to make. Total cycle time
actually increased.
“Our strategic
plan
message is not really getting
through,”
Peter thought.
<2>
Second surprise: Sales.
The new strategy called for a
shift
—
emphasize
high margin sales rather that pushing
product down the pipeline as fast as possible.
But just about every salesperson Peter
spoke to was making transactional sales to
high-volume customers; hardly anyone
was building relationships with the most
profitable prospects.
Sales
is doing just what it’s always done,
Peter thought
.
<3>
Worst
surprise: Even his top team, the people who’d
helped him craft the
strategy, was not
sticking to plan. Peter asked a team member:
“Why are you
spending all your time
making sure the new machinery is working instead
of
developing new markets?”
“Because my unit’s chief
goal was to improve on
-
time
delivery,” he answered.
“But what about
company
goals?”
said Peter. “We came up with a good plan and
communicated it v
ery
clearly. But nowhere it isn’t being carried out.
Why?”
Hay Group,
Inc. All rights reserved
1
Many organizations create good
strategies, but only the best execute them
effectively.
Fortune magazine
estimates that when CEOs fail, 70% of the time
it’s because of bad
execution.
1
Weak
execution is pervasive in the business world, but
the reasons for it are
largely
misunderstood. Why is it that no one in Peter’s
organization was acting in sync
with
the strategy? Unless we understand the reasons,
we can’t hope to solve the problem.
Imagine
someone
hitting a tennis ball. When the brain says “hit
the ball,” it doesn’t
automatically
happen. The message travels through nerve
pathways down the arm and
crosses gaps
between the nerve cells. These gaps, or
“synapses,” are potential breaks in
the
connection. If
neurotransmitters
don’t carry the message across the gap,
the message
never gets through, or it
gets distorted. When that happens, either the arm
doesn’t move
at all, or it moves the
wrong way.
Creating a
“culture of dialogue”
Just
like a nervous system, organizations also have
gaps that block and distort messages.
The secret to effective strategy
execution lies in crossing hierarchical and
functional gaps
with clear, consistent
messages that relay the strategy throughout the
organization.
Sound simple? It’s
not. The reason is that the “neurotransmitters”
in organizations are
human
beings
—
executive team
members, senior managers, middle managers and
supervisors
—whose job it is
to make sure that people’s behavior is aligned
with the
overall strategy. Doing what
it takes to achieve alignment is very difficult.
It is what
Ram Charan calls, the “heavy
lifting” of management, and it’s the key to
executing
strategy.
As we’ll see later, there is an
important difference between companies
tha
t successfully
align
behavior with strategy and those that do not.
Companies that effectively execute
strategy create a “culture of
dialogue.” A culture of dialogue encourages
pervasive two
-
way
communications where individuals and groups 1)
question, challenge, interpret and
ultimately clarify strategic
objectives; and 2) engage in regular performance
dialogue to
monitor behavior and ensure
it is aligned with strategy.
Three keys to managing performance
A culture of dialogue doesn’t happen
instantly, an
y more than a fluid tennis
stroke does.
It takes practice,
persistence and hard work. So how exactly can
leaders ensure that
strategy messages
go all the way down the
line
—
that the tennis ball
gets hit correctly?
The three keys to
managing performance effectively are:
1.
Achieving
radical clarity by decoding strategy at the top.
Many organizations
think
they send
clear signals but don’t. In some cases, managers
subordinate broad
strategic goals to
operational goals within their silos. That’s what
happen
ed with
Peter’s top
team. Elsewhere, top team members often have too
many “top”
priorities
—we’ve
seen as many as 100 in one case—
which
results in mixed signals
and blurred
focus. Strategy decode requires winnowing
priorities down to a
manageable
number
—
as little as five.
1
“Why CEOs
Fail,” by Ram Charan and Geoffrey Colvin,
Fortune
magazine, June 21,
1999.
Hay Group, Inc. All rights
reserved
2
2.
Setting up systems and processes to
ensure clarity.
Once strategy is clear,
organizations must create processes to
ensure that the right strategy messages cascade
down the organization. These include:
strategy-centered budget and planning
sessions; staff and team meetings to
discuss goals; performance management
meetings; and talent review sessions.
Dialogue drives all these processes. Each
represents a “transmitter opportunity,”
where strategic messages are conveyed and
behavior is aligned with goals.
3.
Aligning and differentiating
rewards.
Leaders
must make sure rewards encourage
behaviors consistent with strategy,
which sounds easy but isn’t. Differentiation is
about making sure that stars get
significantly more than poor performers. But
almost
everywhere managers distribute
rewards more or less evenly. As we’ll see, lack
of
effective performance dialogue is a
key contributor to dysfunctional reward schemes.
We list these three items
separately but they are, of course,
interconnected. Systems and
processes
depend on clarity from the top. Differentiation
and alignment of rewards
depend on
managers using performance systems effectively.
Dialogue is the glue that
holds it all
together. But not just any dialogue will do. It
must be dialogue with purpose,
focused
on performance.
Link to
company valuation
Companies that manage
performance well
—
General
Electric comes to mind
—
have
higher market valuations. Why?
Because, more and more, institutional investors
view
strategy execution as a vital
factor influencing stock prices.
Just a few years ago institutional
investors relied almost exclusively on financial
measures for company valuations. Now
35% of a market valuation is influenced by
non-
financial,
intangible factors, according to a study by Ernst
& Young.
2
The study showed
that
“execution of corporate
strategy”
and
“management
credibility”
ranked number one
and number two in importance to
institutional investors out of 22 non-financial
measures.
John Inch, a managing
director and analyst at Bear Stearns notes that in
some sectors,
such as diversified
industrial companies, intangibles account for even
more
—
up to half a
company’s value. “You can take even a
mundane asset and inject good management and
have something pretty
strong
,” says Inch.
2
Based on a study conducted
by Sarah Mavrinac and Tony Siesfeld for the Ernst
& Young Center for
Business Innovation.
Hay Group, Inc. All rights reserved
3