The Gap Nobody Knows
The CEO was sitting in his office late one evening, looking tired and
drained. He was trying to explain to a visitor why his great strategic
initiative had failed, but he couldn't figure out what had gone wrong.
"I'm so frustrated," he said. "I got the group together a year ago,
people from all the divisions. We had two off-site meetings, did
benchmarking, got the metrics. McKinsey helped us. Everybody agreed with
the plan. It was a good one, and the market was good.
"This was the brightest team in the industry, no question about it. I
assigned stretch goals. I empowered them-gave them the freedom to do
what they needed to do. Everybody knew what had to be done. Our
incentive system is clear, so they knew what the rewards and penalties
would be. We worked together with high energy. How could we fail?
"Yet the year has come to an end, and we missed the goals. They let me
down; they didn't deliver the results. I have lowered earnings estimates
four times in the past nine months. We've lost our credibility with the
Street. I have probably lost my credibility with the board. I don't know
what to do, and I don't know where the bottom is. Frankly, I think the
board may fire me."
Several weeks later the board did indeed fire him.
This story-it's a true one-is the archetypal story of the gap that
nobody knows. It's symptomatic of the biggest problem facing
corporations today. We hear lots of similar stories when we talk to
business leaders. They're played out almost daily in the press, when it
reports on companies that should be succeeding but aren't: Aetna, AT&T,
British Airways, Campbell Soup, Compaq, Gillette, Hewlett-Packard,
Kodak, Lucent Technologies, Motorola, Procter & Gamble, Xerox, and
These are good companies. They have smart CEOs and talented people, they
have inspiring visions, and they bring in the best consultants. Yet
they, and many other companies as well, regularly fail to produce
promised results. Then when they announce the shortfall, investors dump
their stocks and enormous market value is obliterated. Managers and
employees are demoralized. And increasingly, boards are forced to dump
The leaders of all the companies listed above were highly regarded when
they were appointed-they seemed to have all of the right qualifications.
But they all lost their jobs because they didn't deliver what they said
they would. In the year 2000 alone, forty CEOs of the top two hundred
companies on Fortune's 500 list were removed-not retired but fired or
made to resign. When 20 percent of the most powerful business leaders in
America lose their jobs, something is clearly wrong. This trend
continued in 2001 and will clearly be in evidence in 2002.
In such cases it's not just the CEO who suffers-so do the employees,
alliance partners, shareholders, and even customers. And it's not just
the CEO whose shortcomings create the problem, though of course he or
she is ultimately responsible.
What is the problem? Is it a rough business environment? Yes. Whether
the economy is strong or weak, competition is fiercer than ever. Change
comes faster than ever. Investors-who were passive when today's senior
leaders started their careers-have turned unforgiving. But this factor
by itself doesn't explain the near-epidemic of shortfalls and failures.
Despite this, there are companies that deliver on their commitments year
in and year out-companies such as GE, Wal-Mart, Emerson, Southwest
Airlines, and Colgate-Palmolive.
When companies fail to deliver on their promises, the most frequent
explanation is that the CEO's strategy was wrong. But the strategy by
itself is not often the cause. Strategies most often fail because they
aren't executed well. Things that are supposed to happen don't happen.
Either the organizations aren't capable of making them happen, or the
leaders of the business misjudge the challenges their companies face in
the business environment, or both.
Former Compaq CEO Eckhard Pfeiffer had an ambitious strategy, and he
almost pulled it off. Before any of his competitors, he saw that the
so-called Wintel architecture-the combination of the Windows operating
system and Intel's constant innovation-would serve for everything from a
palm-held to a linked network of servers capable of competing with
Mirroring IBM, Pfeiffer broadened his base to serve all the computing
needs of enterprise customers. He bought Tandem, the high-speed,
failsafe mainframe manufacturer, and Digital Equipment Company (DEC) to
give Compaq serious entry into the services segment. Pfeiffer moved at
breakneck speed on his bold strategic vision, transforming Compaq from a
failing niche builder of high-priced office PCs to the second-biggest
computer company (after IBM) in just six years. By 1998 it was poised to
dominate the industry.
But the strategy looks like a pipe dream today. Integrating the
acquisitions and delivering on the promises required better execution
than Compaq was able to achieve. More fundamentally, neither Pfeiffer
nor his successor, Michael Capellas, pursued the kind of execution
necessary to make money as PCs became more and more of a commodity
Michael Dell understood that kind of execution. His direct-sales and
build-to-order approach was not just a marketing tactic to bypass
retailers; it was the core of his business strategy. Execution is the
reason Dell passed Compaq in market value years ago, despite Compaq's
vastly greater size and scope, and it's the reason Dell passed Compaq in
2001 as the world's biggest maker of PCs. As of November 2001, Dell was
shooting to double its market share, from approximately 20 to 40
Any company that sells direct has certain advantages: control over
pricing, no retail markups, and a sales force dedicated to its own
products. But that wasn't Dell's secret. After all, Gateway sells direct
too, but lately it has fared no better than Dell's other rivals. Dell's
insight was that building to order, executing superbly, and keeping a
sharp eye on costs would give him an unbeatable advantage.
In conventional batch production manufacturing, a business sets its
production volume based on the demand that is forecast for the coming
months. If it has outsourced component manufacturing and just does the
assembling, like a computer maker, it tells the component suppliers what
volumes to expect and negotiates the prices. If sales fall short of
projections, everybody gets stuck with unsold inventory. If sales are
higher, they scramble inefficiently to meet demand.
Building to order, by contrast, means producing a unit after the
customer's order is transmitted to the factory. Component suppliers, who
also build to order, get the information when Dell's customers place
their orders. They deliver the parts to Dell, which immediately places
them into production, and shippers cart away the machines within hours
after they're boxed. The system squeezes time out of the entire cycle
from order to delivery-Dell can deliver a computer within a week or less
of the time an order is placed. This system minimizes inventories at
both ends of the pipeline, incoming and outgoing. It also allows Dell
customers to get the latest technological improvements more often than
Build-to-order improves inventory turnover, which increases asset
velocity, one of the most underappreciated components of making money.
Velocity is the ratio of sales dollars to net assets deployed in the
business, which in the most common definition includes plant and
equipment, inventories, and accounts receivable minus accounts payable.
Higher velocity improves productivity and reduces working capital. It
also improves cash flow, the life blood of any business, and can help
improve margins as well as revenue and market share.
Inventory turns are especially important for makers of PCs, since
inventories account for the largest portion of their net assets. When
sales fall below forecast, companies with traditional batch
manufacturing, like Compaq, are stuck with unsold inventory. What's
more, computer components such as microprocessors are particularly prone
to obsolescence because performance advances so rapidly, often
accompanied by falling prices. When these PC makers have to write off
the excess or obsolete inventory, their profit margins can shrink to the
Dell turns its inventory over eighty times a year, compared with about
ten to twenty times for its rivals, and its working capital is negative.
As a result, it generates an enormous amount of cash. In the fourth
quarter of fiscal 2002, with revenues of $8.1 billion and an operating
margin of 7.4 percent, Dell had cash flow of $1 billion from operations.
Its return on invested capital for Fiscal 2001 was 355 percent-an
incredible rate for a company with its sales volume. Its high velocity
also allows it to give customers the latest technological improvements
ahead of other makers, and to take advantage of falling component
costs-either to improve margins or to cut prices.
These are the reasons Dell's strategy became deadly for its competitors
once PC growth slowed. Dell capitalized on their misery and cut prices
in a bid for market share, increasing the distance between it and the
rest of the industry. Because of its high velocity, Dell could show high
return on capital and positive cash flow, even with margins depressed.
Its competition couldn't.
The system works only because Dell executes meticulously at every stage.
The electronic linkages among suppliers and manufacturing create a
seamless extended enterprise. A manufacturing executive we know who
worked at Dell for a time calls its system "the best manufacturing
operation I've ever seen."
As this book goes to press, the merger between Compaq and
Hewlett-Packard, proposed in mid-2001, is still up in the air. No
matter: Alone or in combination, nothing they do will make them
competitive with Dell unless they come up with an equal or better
build-to-order production model.
The chronic underperformers we've mentioned so far have lots of company.
Countless others are less than they could be because of poor execution.
The gap between promises and results is widespread and clear. The gap
nobody knows is the gap between what a company's leaders want to achieve
and the ability of their organization to achieve it.
Everybody talks about change. In recent years, a small industry of
changemeisters has preached revolution, reinvention, quantum change,
breakthrough thinking, audacious goals, learning organizations, and the
like. We're not necessarily debunking this stuff. But unless you
translate big thoughts into concrete steps for action, they're
pointless. Without execution, the breakthrough thinking breaks down,
learning adds no value, people don't meet their stretch goals, and the
revolution stops dead in its tracks. What you get is change is for the
worse, because failure drains the energy from your organization.
Repeated failure destroys it.
These days we're hearing a more practical phrase on the lips of business
leaders. They're talking about taking their organizations to the "next
level," which brings the rhetoric down to earth. GE CEO Jeff Immelt, for
example, is asking his people how they can use technology to
differentiate their way to the next level and command better prices,
margins, and revenue growth.
This is an execution approach to change. It's reality-based-people can
envision and discuss specific things they need to do. It recognizes that
meaningful change comes only with execution.
No company can deliver on its commitments or adapt well to change unless
all leaders practice the discipline of execution at all levels.
Execution has to be a part of a company's strategy and its goals. It is
the missing link between aspirations and results. As such, it is a
major-indeed, the major-job of a business leader. If you don't know how
to execute, the whole of your effort as a leader will always be less
than the sum of its parts.
Excerpted from "Execution: The Discipline of Getting Things Done" by Larry Bossidy. Copyright © 2002 by Larry Bossidy. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.