Schoolbook knowledge suggests that companies develop a corporate strategy to guide the firm’s future course of action. After the aspirations and ambitions are articulated and announced to capital markets and other constituents, the implementation process starts. Research shows, however, that 70% of business strategies fail to get fully implemented. Making strategy work is obviously more difficult than making strategy.

Keeping the high failure rate in mind, capital markets track whether companies in fact “walk their talk”, i.e., deliver against the initially announced corporate strategy. While publicly listed firms rely on stories telling how and why the company will assert itself successfully in the markets of the future, we all know that a company achieves long-term success not with its story, but with its actions. The reasons for inconsistencies between announced and implemented strategies are multifaceted. On the one hand the management might not be willing or able to steer the resource allocation processes according to the intended strategy. On the other hand a delta between announced and realized strategy could be caused by unforeseen external developments that emerge during the implementation process and call for a revision of the initial plan. In any case executives will have many good excuses why the announced strategy has not or has only partly been realized.

In an effort aimed to measure whether companies walk their strategy talk and how their behavior affects capital market performance, in cooperation with the Universities of St. Gallen and Dortmund and the European Business School we developed a software tool called Resourcer that is able to track whether publicly communicated resource allocations decisions such as investments, divestments, and cooperations in fact match the initially announced strategy of a company. Data records were generated from multiple sources, such as company documents (e.g., annual reports, road shows), business press articles, and various external research sources (e.g., analyst reports, databases).

Given that format, context, and degree of information obviously vary among the different data sources we transformed all information into a joint format and coded each data record according to its alignment with the announced corporate strategy. Only in cases where a clear relationship (either positive or negative) between the strategy and a single decision appeared were the data records included in the analyses.

Overall, we included 36 firms across many industries (financial services, pharma, retail, chemical, automotive, retail, transportation, and telecom) over 5 to 10 years into our sample (ca. 18’000 resource allocation decisions) and linked the degree of implementation consistency to the relative performance of each company (compared to industry indexes). Two major results came out of our analyses:

For some overperforming firms we found a positive correlation between implementation consistency and their relative stock performance, i.e., they are being rewarded from capital markets to continue with their agreed upon strategy.

Volatility in implementation consistency is systematically punished by capital markets, i.e., if companies vary their alignment of resource allocation with the announced strategy they are worse off, even if the implementation consistency on average is still comparable to peers.
 
The second finding is striking since volatility in strategy implementation can arouse mistrust of shareholders and investors and might lead to discounts on the stock price. Executives are charged with the daunting task of securing the alignment of strategic actions with the announced corporate concept or need to explain why they diverge from the initial path because clinging to the “wrong” corporate concept maybe even is more detrimental to firm performance.

Benefits from the walk-the-talk analysis are manifold. Walk-the-talk analysis provides a fact base for fruitful discussions on strategy implementation among the executive and/or management committee. Using publicly available sources for the analysis it provides a perspective on how strategy implementation is perceived by capital markets and how this impacts firm performance. In this respect it allows capturing misalignments between announced and realized strategy early on and identifies underlying drivers at the business unit, functional or regional level. In addition, walk-the-talk analysis monitors the effectiveness of corporate communication processes. A delta between announced and implemented strategy could indicate whether the right and consistent messages are getting into the market. 
 
The world is too complex that consistency between intended and realized strategy per se leads to superior performance. Of course, companies that walk their talk and deliver on their announced strategy build credibility and trust with their investors, employees and other constituents; but this relationship cannot be proven systematically. Our recent research (see Brauer/Schmidt, 2006, 2005; Richter/Schmidt, 2005; Schmidt/Brauer, 2006) shows that especially firms competing in high-velocity environments display an oscillating strategy implementation behavior which seems opportunity driven.
In investigating the degree of consistency between announced and executed strategies in high- and low-performing firms interesting findings occur.

For a short presentation on Walk the Talk analysis please click here. For additional information and to arrange a demonstration, see www.resourcer.ch or contact Sascha Schmidt.
 
References
Richter, A. and Schmidt, S.: 2005, “How does strategy process influence strategy content? Antecedents of consistency between resource allocation decisions and corporate strategy”, Schmalenbach Business Review (forthcoming)
Schmidt, S. L. and Brauer, M.: 2005, Corporate Governance: „Möglichkeiten des Aufsichtsrats zur sachgerechten Kontrolle von Managerverhalten und Firmenpolitik“, The German Journal of Industrial Relations 12(3): 306-322.
Schmidt, S. L. and Brauer, M.: 2006, “Strategic Governance: How to assess board effectiveness in guiding strategy execution”, Corporate Governance: An International Review 14(1): 12-21.