Strategy That Works

Key Concepts

The Strategy-to-Execution Gap

“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.” (p. 1)

“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.” (p. 4)

“When your company is coherent, you don’t have to struggle to overcome the strategy-to-execution gap. There is no gap.” (p. 5)

“Commit to an Identity”

“A true identity, by contrast, expresses what your enterprise does exceptionally well and why it matters.” (p. 32)

“A good place to start closing your strategy-to-execution gap is by first defining two or three primary elements of your identity: a clear, recognizable value proposition and the capabilities system that supports it. You continue to iterate these; with each iteration, you match them more closely together. At some point you must consider how these fit your portfolio of products and services and how to drive coherence among all three elements.” (p. 43)

“Your capabilities system is the group of three to six distinctive capabilities that differentiate you from other companies and that allow you to deliver on your value proposition. These critically important capabilities do not stand alone; they are part of a mutually reinforcing system, which is the key to a company’s differentiation.” (p. 45)

“But there is a second reality, just as powerful: distinctive capabilities are inherently slow to change. The capabilities system in any large, coherent enterprise involves hundreds or thousands of people as well as embedded investments in technology and specialized skills. These capabilities have been built up slowly, decision by decision, and thus they are sticky: they take time to update and replace.” (p. 54)

“Translate the Strategic into the Everyday”

“Your new approach to building capabilities will be your own approach: bespoke to your company. You will not benchmark or copy it from anyone else—at most, you will borrow details and practices and convert them to your own way of doing things. This approach may also be unfamiliar. For all their experience in functional excellence, most companies have rarely built truly distinctive cross-functional capabilities in their own way. They follow a program created with generic business in mind. They end up with functional activity similar to every other company’s functional activity.” (p. 70)

“Balancing Tacit and Explicit Knowledge”

“To bring that knowledge to scale, you must take it beyond the purview of the elite “special forces.” It must become explicit. It must be captured systemically, with clear instructions—like recipes and routines—or must be embedded in processes and technological setups, like algorithms and blueprints, that anyone could use to execute well. These codified routines and practices must be treated as standard practice: repeated at every level, in every location. Otherwise, the company loses its consistent value, and its distinctive capabilities are lost. (Codifying the capabilities is not the same as creating a blueprint. The blueprint describes the capability and how it works, including the need for codification. The codification is embedded instructions: knowledge used to put it into practice throughout the company.)” (p. 112)

“Or as organizational learning specialist Robert Putnam puts it, “The learning of skills begins with recipes. Without practice, the concept won’t be second nature. But until it’s second nature, you can’t practice with it effectively. So you short-cut the dilemma by following a set of rules”—at least at first, until you don’t need the rules anymore.” (p. 113)

“If you can balance tacit and explicit knowledge successfully, the result is a paradoxical, but very effective, combination of people marching in step but thinking for themselves.” (p. 116)

“Put Your Culture to Work”

“Companies that define themselves by their capabilities, instead of by their financial results or an abstract mission statement, thus enjoy a huge cultural advantage.” (p. 124)

“Suppose, then, that you are on your way—that you are following the first two acts, and your company has a clearer identity and a stronger capabilities system. One of the first changes you will notice is a rise in the level of emotional commitment. When people understand the identity of the enterprise, and when they feel aligned with that identity, they are ready to give more of themselves to the enterprise, because they see its success as their own.” (p. 125)

“In their book The Wisdom of Teams, Jon Katzenbach and Douglas R. Smith report that mutual accountability is the clearest indicator of what they call a “real team”—a team whose people share goals and work interdependently, as opposed to merely being assigned to the same projects.9 This type of team-based collaboration is particularly important for distinctive capabilities, which are inherently cross-functional. When the culture reinforces the attitude that people are responsible for the success of the enterprise, not just for their functions, it is much easier to bring a distinctive capability to life.” (p. 131)

“Cut Costs to Grow Stronger”

“If your costs are not fully driving your strategy, then what chance will you have to execute it successfully? The answer is to place intensive interest in differentiating the costs that don’t matter from the costs that do. This important distinction is a way of life in most of the companies we looked at closely.” (p. 146)

“You now begin an exercise in strategy and cost management that will empower you to bring your capabilities system to life. You will judge the value of each business, function, or project according to how it lines up with your company’s value proposition and capabilities system. Distinctive capabilities will get the resources they need to realize their full potential. Everything else is up for reconsideration, as if it’s a new expense. You’ll gain an in-depth awareness of the expense of building, maintaining, and extending distinctive capabilities systems. You’ll pay for them by taking the money from everything else.” (p. 148)

Parking Lot budgeting exercise

“Having made the important decision to connect cost to strategy, you now begin to rethink your investments in capabilities. These were probably hidden in the past within an array of functional budgets. You need to unravel those costs and sort out the implications of your current spending patterns. That is the purpose of what we call the “parking-lot” exercise. In this exercise, you list all the expenses related to the activities of your enterprise. You move them to a metaphorical parking lot. One by one, you’re going to decide whether or not to let them back into the building.” (p. 152)

“The first of the four categories is differentiating capabilities. All these activities are related to the few things you must do better than anyone else to excel at your value proposition. They should get as much investment as they need—enough to fund the point interventions, capabilities innovation, and acquisitions needed to build them, and to fund the costs of scaling them up across the organization…” (p. 153)

“The second category, table stakes (sometimes called competitive necessities), includes the activities that aren’t related to your differentiating capabilities, but that you need to stay viable in your industry.” (p. 154)

“When thinking about table-stakes allocations, make sure you target the right level of proficiency: All too often, companies underinvest in some table-stakes capabilities and overinvest in others.” (p. 154)

“The third category is lights-on activities. These basic business costs are required simply to operate. Legal, administrative, and facilities costs often fall in this category. Lights-on activities should receive just enough cash to keep things going (which will typically be less than competitors spend and proportionately less than table stakes). These costs should be subject to strict scrutiny, constant pruning, and a continuous search for greater efficiency.” (p. 157)

“The final category is simply costs that are not required. These costs do not contribute to the business in any tangible way, but nonetheless show up on the income statement. There is generally more in this category than you’d expect.” (p. 157)

“Shape Your Future”

“But the companies we’ve studied, the companies that close the gap between strategy and execution, take a better approach. Instead of reacting to change, they get out in front of it. They leverage their advantaged capabilities system, not with a string of random growth plays but by using their capabilities to sustain new kinds of growth. Like these companies, you can shape your own future in at least three distinct (and complementary) ways:

• “You can recharge, innovate, and extend your capabilities system, becoming more proficient than you were before, building on your existing differentiation and making it stronger.

• “You can create demand by making use of the insights you have about your customers, creating products and services that define their needs, and in the process disrupting the businesses of your competitors.

• “You can step out in front of your industry and realign it around your own strengths, becoming a supercompetitor: a company whose value proposition and capabilities system define a business ecosystem around it, to its advantage.” (p. 174)

Quotables

“Some coherent companies literally exist to change the world or at least their part of it.” (p. 62)

“‘The greater danger for most of us lies not in setting our aim too high and falling short, but in setting our aim too low and achieving our mark,’ said Michelangelo.” (p. 193)

“Not surprisingly, each of the four basic schools of thought (position, execution, adaptation, and concentration) has something significant to offer business strategists, as long as the ideas are adopted in an appropriately balanced way. But if you keep switching between them, as some companies do, you will simply end up using each one to compensate for the failings of the previous fashion. You’ll never make time to go in your own chosen direction.” (p. 202)