By Matthew Robb, Paul Todd, and David Turnbull

Here is the paradox: many companies know they have great strategies and great people, but their performance doesn't meet the aspirations of their top managers or shareholders. The cause of this disappointment may even seem obvious. If the CEO assigns a small task force of senior managers or highfliers to find the answer, it will quickly pinpoint the immediate culprits--confused accountability within the leadership group, perhaps, or an unforeseen shift in the balance of power between business units and the corporate center.

Once the task force has identified the problems, the CEO may be tempted to fix them straightaway--for example, by spelling out the accountability of different executives or rebalancing the rights and responsibilities of the business units and the corporate center. But performance-sapping organizational problems like these may have complicated roots linking one problem to another. Unclear accountability at the top may be symptomatic of a serious power vacuum within the leadership group, and this may be spurring business units to become more autonomous. Trying to fix what is actually an effect of the problem rather than the cause won't solve anything.

The kind of high-level, "outside-in" diagnosis that reveals the problems undermining performance is unlikely to afford insights into their root causes, how they are linked to one another, or how to sort them out. Getting more people to step inside the company's workings and uncover the complex roots of underperformance can be the first step toward developing lasting solutions, as the case of ManufactCo (not its real name) illustrates.

Collective discovery

ManufactCo, a manufacturing organization with 8,000 employees, produces and markets its products in more than 20 countries. In the 1980s and '90s, it went through acquisitions that brought in a heritage of varied business cultures and ways of getting things done. Three or four years before the period described here, ManufactCo's return on capital employed (ROCE) had been in the industry's top decile. Yet over those years, its performance gradually dipped into the second quartile--good but not leading edge. The organization wasn't doing as well as almost anyone in it thought it could.

Leaders at ManufactCo weren't sure why it had lost its performance edge. Its products were strong. It had a good reputation and high-quality people. Managers and employees placed an extraordinary emphasis on delivering high performance. At the beginning of every year, the center and the business units negotiated stretch targets for each unit. Every month the units submitted to the center detailed financial results, with key performance indicators and updated annual forecasts. The CEO publicly challenged the heads of the business units in regular management meetings: he dug into the numbers to discover what had really happened in the previous quarter and tested the executives on the competitive environment--all to gauge what level of performance might be possible. Targets were thus often increased throughout the year. All unit managers attended these quarterly reviews, and the sense of theater they created was a powerful incentive for each manager to come prepared to give a convincing performance. Despite the strengths of this process, the company persistently fell short of its aspirations.