Many executives believe that the strategic planning process is synonymous with strategy formation. Wikipedia acknowledges the relationship between the two with the following definition: “Strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.” The site also defines strategy as “a high level plan to achieve one or more goals under conditions of uncertainty.” So, certainly from a theoretical perspective it seems like strategy should be derived during the strategic plan process.
Using this definition, it should follow that senior management uses the strat plan process to focus on the company’s growth targets, the activities designed to support those targets, and the resources required. The strat plan would derive a broad course over a five-year horizon, with a focus on the next twelve months of operational activity. But does this hold true in the real world?
Before we go on, consider my definition of strategy: “a planned set of structured decisions that leverage company competencies into a better business outcome.” This outcome could be financial growth or it could be the mitigation of some negative environment impact. What this means is I don’t see strategy as just a plan. I see the goal of strategy is to proactively manage a company’s evolving environment. Strategy is not an end point to be recorded and placed on the shelf. On a superficial level I agree that strategy serves as a map or guide for achieving the company vision. What I see differently is that strategy becomes the framework for decision-making on resources and focus. It prioritizes and aligns operational activity, and defines accountability for results. It encompasses action, monitoring and adjustments.
Either strategy definition indicates that it starts by broadly examining the company environment. But according to a recent survey of 2400 executives by McKinsey, only about 13% of companies use environmental macrotrends as a primary input during the strat plan process. Instead, 45% use some form of company financials, either existing revenue or projected revenue, as the primary driver in the strat plan process.
This implies that rather than using external trends to identify and focus on business opportunities, a large percentage of companies use internal metrics to drive the strat plan process. So if we accept the concept that strategy is intended to proactively manage our environment, we’d have to conclude that a typical strat plan process does not drive company strategy, since the key inputs to the strat process are internal.
I first reached this conclusion while participating in the strat plan process of my Fortune 300 company. The strategic planning process devolved into a business unit resource allocation exercise for the coming year. Winning or losing this negotiation had a direct impact on executive compensation. As a result, the strategic planning process transformed from a long-term decision-driving effort into a negotiation where resource requests for the next 12 months were met in exchange for revenue growth commitments over that same timeframe.
In this kind of corporate environment, management is incentivized to propose tactical approaches with short-term payback. Presenting high-risk, high-reward strategic activity is discouraged, because in the budget allocation game, executives reward the more finite opportunities with expense dollars. And since business units usually know the parameters for a reasonable expense increase request, proposing a longer term program requires them to eliminate a short-term program. This means that for every long-term strategy proposed, the business unit heads risk losing their expense increase to another business unit that presents a better short-term payoff. Of course with stakes this high business groups spend inordinate amounts of time and effort developing packages that present the financial upside of incremental resourcing, but this has little to do with strategy formation.
I’ve observed similar approaches to strat planning in other companies too. So in most companies, the term “strategic planning process” is really a misnomer because strategies are rarely introduced during its namesake process. There is no incentive to propose strategies with long-term potential because they are less likely to receive funding. If strategic issues arise during the strategic planning process, they are usually tabled for a more-detailed examination outside the process.
Quite frankly I agree that strategy formation should not be included in the strat plan process. Strategic decision-making cannot be performed using the broad-brush approach usually seen in a company’s strategic planning process. During this cycle, executives really cannot afford the time to examine a new strategic course.
Strategic decision-making requires focus. The best decisions are made when a wide array of alternatives are presented, followed by a collection of data specifically related to the issue under consideration. Because of their complexity, strategic issues require detailed analysis and dialogue, with input from executives representing a wide array of business disciplines. The decision team needs to take the time to delve heavily into detail and make choices. And this really can’t happen during the strat plan process. Strategic decision-making is the result of a deliberate analysis comparing solutions to a singular strategic issue.
Strategy formation needs to stand apart from the typical strat plan cycle in order to have the greatest impact on the company.