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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, departmentswhole business unitssimply didnt “get it.”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.Second surprise: Sales. The new strategy called for a shiftemphasize 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 its always done, Peter thought. Worst surprise: Even his top team, the people whod 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 units 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 very clearly. But nowhere it isnt being carried out. Why?”Many organizations create good strategies, but only the best execute them effectively. Fortune magazine estimates that when CEOs fail, 70% of the time its because of bad execution. “Why CEOs Fail,” by Ram Charan and Geoffrey Colvin, Fortune magazine, June 21, 1999. Weak execution is pervasive in the business world, but the reasons for it are largely misunderstood. Why is it that no one in Peters organization was acting in sync with the strategy? Unless we understand the reasons, we cant hope to solve the problem.Imagine someone hitting a tennis ball. When the brain says “hit the ball,” it doesnt 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 dont carry the message across the gap, the message never gets through, or it gets distorted. When that happens, either the arm doesnt 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? Its not. The reason is that the “neurotransmitters” in organizations are human beingsexecutive team members, senior managers, middle managers and supervisorswhose job it is to make sure that peoples 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 its the key to executing strategy. As well see later, there is an important difference between companies that 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 performanceA culture of dialogue doesnt happen instantly, any 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 linethat 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 dont. In some cases, managers subordinate broad strategic goals to operational goals within their silos. Thats what happened with Peters top team. Elsewhere, top team members often have too many “top” prioritiesweve seen as many as 100 in one casewhich results in mixed signals and blurred focus. Strategy decode requires winnowing priorities down to a manageable numberas little as five. 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 isnt. Differentiation is about making sure that stars get significantly more than poor performers. But almost everywhere managers distribute rewards more or less evenly. As well 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 valuationCompanies that manage performance wellGeneral Electric comes to mindhave 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. Based on a study conducted by Sarah Mavrinac and Tony Siesfeld for the Ernst & Young Center for Business Innovation. 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 moreup to half a companys value. “You can take even a mundane asset and inject good management and have something pretty strong,” says Inch. 1. Achieve Radical Clarity by decoding strategy at the topThe first step in successfully executing strategy is achieving clarity on the top team, which is frequently the source of garbled signals. Lack of Clarity at the TopA recent Hay Group study Hay Group partnered with Richard Hackman of Harvard University and Ruth Wageman of Dartmouth College to identify the dynamics of top executive teams and their impact on performance. From an initial group of 48 teams, the researchers narrowed their study to 14 teams, many from large global organizations. Each team member represented the head of an organization, a major business division, or a major geography. shows a disturbing lack of clarity on top teams (organizational clarity measures the extent to which employees understand what is expected of them and how those expectations connect with the organizations larger goals). The chart below shows dramatically higher levels of clarity on outstanding vs. average teams. In fact the biggest single difference between great and average top teams and typical ones was in the level of internal clarity. See Figure 1.Figure 1: Organizational Climate and Teams58%18%Figure 1: Measures organizational climate dimensions for outstanding top teams vs. typical ones. For each dimension of climate we asked how the team was performing in reality and how it should be performing. Then we measured the difference or “gap” in their answers. Gaps over 20% hurt performance. The “clarity” gap for typical teams was 58% compared with 18% on outstanding teams. Change Hay/McBer to “Source: Hay Group, Inc.” in final versionAnd a Lack of Clarity BelowWorkers at lower levels strongly feel this lack of clarity. Figure 2 looks at satisfaction levels for workers planning to leave their organizations within two years versus those planning to stay longer. This study showed that a key reason people leave their jobs is that they feel their companies lack direction. Even among employees planning to stay more than two years at their companies, only 57% felt their organizations had a clear sense of direction. Figure 2: Key reasons why employees leave their companies Total % Satisfied Source: Hay Group, Inc. The results are from our Employee Attitude Survey, which sampled some 300 companies representing more than 1 million workers. Our survey queried management, professionals, salespeople, information technologists, and clerical and hourly workers. The “gap” referred to in the table is the “satisfaction gap” between workers planning to leave within two years and those planning to stay longer.Satisfaction with:Employees planning to stay more than two years (%)Employees planning to leave in less than two years (%)GAP(%)1. Use of my skills and abilities83%49%34%2. Ability of top management74%41%33%3. Company has clear sense of direction57%27%30%NOTE; HIGHLIGHT SECTION 3; MAKE IT POP GRAPHICALLYClarity mattersWhy do employees crave clarity? Think about it. What could be more demoralizing than the realization that your hard work is not contributing to overall company goals? Employees want to do the “right” thing, but they can only do so if they know what the right things are. Unfortunately, as we saw in our opening vignette, companies often dont communicate strategic goals effectively. An oil refinery client, for example, set a strategic goal to cut costs. To see how well the message had gotten through, an operations team leader held a strategy decode session where he quizzed his team members on what they felt was the chief priority. Ten team members produced four different “top” objectives, including cost-cutting, safety, environmental compliance and reducing sales processing time. The message hadnt got through. The team leader called his team together and created a “transmitter opportunity.” “Dont you guys realize that if we cant cut our refining costs by three cents a gallon, theyre going to shut us down?” he said.“Is that all you need us to do?” replied the team members, taken aback. United by a clear direction and shared ownership of the cause, team members enthusiastically cut costs by five cents per gallon over the following year while continuing to maintain good safety and environmental records.Narrowing prioritiesHaving too many priorities can lead to lack of clarity. AeroMexico, for example, had worked with a strategy consulting firm that delivered a 249-page report listing key performance indicators (KPIs) for measuring progress by the enterprise. The good news was that the KPIs gave the top team metrics for measuring success. The bad news was that there were 100 of them, and they werent prioritized. “It was clear that execution would suffer unless we identified the most important ones, says AeroMexico CEO Arturo Barahona. “So we discussed which ones connected most directly with our strategic priorities and where we were in the business cycle, and each team member settled on five chief goals.” By gaining clarity on key objectives, the team greatly increased the odds that signals would transmit clearly down the line. Getting buy-in at the topHay research on teams has shown that its not uncommon for team members to nod their heads in agreement when new strategies are set in meetings, then go back to their division or department and carry on exactly as they had before. In effect, they end up sabotaging the plan. Thats why gaining buy-in is essential to effective execution, and dialogue is what makes it happen.IBM created an executive team consisting of six Ph.D-level technical leaders at an applied research unit. Their mission: build strong relationships with top research universities so that IBM could recruit innovative scientists capable of developing breakthrough products. The problem was that the Ph.Ds, all world-class scientists, were used to competing for research dollars and dismissing each others ideas to advance their own. Getting them to work jointly and be held accountable for business results was going to be very difficult.In the first group meeting, the vice president simply assigned accountabilities to the various team members. I could see the scientists digging in their heels, says Harris Ginsberg, an internal leadership consultant who attended the meeting. No one was going to dictate to them what they should do. Even if theyd said yes to the VPs directives, adds Ginsberg, they would never have followed through.Ginsberg, who helps IBM business units clarify and execute strategy, knew the key was to get the scientists talking to each other. So he coached the vice president to change her behaviors. Rather than hand out directives, he suggested ways she could stimulate team dialogue about how to meet objectives. Ginsberg also counseled other team members about the need for a consensus process on an interdependent team.They all got it. At the next meeting the VP said, Our mandate is to create breakthrough products. Without access to talent at the top universities, we wont succeed. How are we going to get it? At first, Ginsberg recalls, she met silence. Finally one team member raised her hand. She was willing to get out there to the universities, and be more visible, go out with the recruiter and the senior human resources people, said Ginsberg. She also agreed to help some up-and-coming scientists learn how to develop relationships with universities.A second team member said he would help her make some calls. The ice wasbroken and all the team members eventually took on group responsibilities. Itwas all about dialogue, says Ginsberg. Until the individual leaders embraced the unifying elements of the strategy for the good of the enterprise, they only attended to their own mission. The dialogue helped them buy-in, agree to some shared activities, and begin to work more collaboratively.2. Set up systems and processes to create clar