When achieving objectives requires a trade off short

Gartner polls of strategy leaders in prior years have shown slow strategy execution to be a top challenge, often because of insufficient visibility and control, a short-term ‘firefighting’ mentality and employee change fatigue.

Sometimes the problem starts with strategy setting. Many executive leaders don't have a documented three- to five-year business strategy because CEOs haven't produced, updated or shared the latest iteration. Sometimes, the enterprise exists, but it hasn’t been shared effectively with business and functional leaders. In yet other cases, the strategy has changed without many business leaders realizing it.

The risk that strategy won't be effectively executed only increases in volatile and disrupted conditions like those experienced during and since the COVID-19 pandemic.

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5 key pillars for effective strategy execution  

Corporate strategists can bridge the strategy-to-execution gap and drive aligned execution in five ways.

Pillar No. 1: Strategy formulation

83% of strategies can fail due to faulty assumptions. Test assumptions about the executability of strategy during formulation. 

History is littered with examples of organizations that hit severe growth stalls because of strategies based on flawed assumptions about customers, competitors or internal capabilities. A lack of clarity leads to unwanted surprises during execution and reduces managers’ ability to monitor uncertainties and respond accordingly. To get execution right, clarify and test relevant assumptions. This includes using mechanisms to both identify and challenge strategic assumptions so your organization can avoid unanticipated issues that derail implementation.

Pillar No. 2: Planning

67% of key functions are not aligned with business unit and corporate strategies. Align objectives to strategy by clarifying the objectives for those tasked with execution. 

It's not unusual for large organizations to conduct strategic planning sessions that cost millions of dollars and hundreds of employee hours each year. Despite these efforts, strategic goals are often unclear or misaligned, which then creates resourcing challenges that limit execution success.

Focus the planning process on vertical alignment between the corporate center and the business units (BUs), and horizontal alignment across BUs and functions. To avoid confusion, begin by clarifying objectives and roles for those in the business tasked with execution.

Pillar No. 3: Performance management

58% of organizations believe their performance management systems are insufficient for monitoring the performance of strategy. Ensure accountability for actions critical to strategy execution and monitor performance. 

Markets can shift between a firm’s strategic planning cycles, thus invalidating assumptions and the strategic plan. Without an effective system to monitor the performance of the strategy, organizations may execute the wrong plan for months — or even years — before correction.

For timely course-correction, use performance management systems to hold employees accountable for key metric goals. Frequent reviews of the plan can determine if underperformance was the result of a bad market assessment, wrong strategy or poor execution.

Also consider a more adaptive approach to strategic planning.

Pillar No. 4: Strategy communication

67% of employees do not understand their role when new growth initiatives are launched. Foster a two-way dialogue about the strategy to ensure organizational buy-in.

To effectively implement a new strategy, employees must understand and support it — both before and during execution. Lack of buy-in only reduces employee commitment and motivation for action and messages that lack credibility increase organizational resistance to change.

What’s needed is a cohesive communication strategy. Without it, employee motivation goes down and resistance goes up, increasing the cost of execution. 

Engage critical employees with targeted communications to win support for the strategy. Start a two-way dialogue or take a page from your organization’s PR playbook to keep employees on board and actively engaged in achieving the company’s objectives.

The risk-return tradeoff states that the potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if the investor will accept a higher possibility of losses.

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Risk-Return Tradeoff

Understanding Risk-Return Tradeoff

The risk-return tradeoff is the trading principle that links high risk with high reward. The appropriate risk-return tradeoff depends on a variety of factors including an investor’s risk tolerance, the investor’s years to retirement and the potential to replace lost funds. Time also plays an essential role in determining a portfolio with the appropriate levels of risk and reward. For example, if an investor has the ability to invest in equities over the long term, that provides the investor with the potential to recover from the risks of bear markets and participate in bull markets, while if an investor can only invest in a short time frame, the same equities have a higher risk proposition.

Investors use the risk-return tradeoff as one of the essential components of each investment decision, as well as to assess their portfolios as a whole. At the portfolio level, the risk-return tradeoff can include assessments of the concentration or the diversity of holdings and whether the mix presents too much risk or a lower-than-desired potential for returns.

Key Takeaways

• The risk-return tradeoff is an investment principle that indicates that the higher the risk, the higher the potential reward.
• To calculate an appropriate risk-return tradeoff, investors must consider many factors, including overall risk tolerance, the potential to replace lost funds and more.
• Investors consider the risk-return tradeoff on individual investments and across portfolios when making investment decisions.

Special Considerations

Measuring Singular Risk in Context

When an investor considers high-risk-high-return investments, the investor can apply the risk-return tradeoff to the vehicle on a singular basis as well as within the context of the portfolio as a whole. Examples of high-risk-high return investments include options, penny stocks and leveraged exchange-traded funds (ETFs). Generally speaking, a diversified portfolio reduces the risks presented by individual investment positions. For example, a penny stock position may have a high risk on a singular basis, but if it is the only position of its kind in a larger portfolio, the risk incurred by holding the stock is minimal.

Risk-Return Tradeoff at the Portfolio Level

That said, the risk-return tradeoff also exists at the portfolio level. For example, a portfolio composed of all equities presents both higher risk and higher potential returns. Within an all-equity portfolio, risk and reward can be increased by concentrating investments in specific sectors or by taking on single positions that represent a large percentage of holdings. For investors, assessing the cumulative risk-return tradeoff of all positions can provide insight on whether a portfolio assumes enough risk to achieve long-term return objectives or if the risk levels are too high with the existing mix of holdings.